Assembly Standing Committee on Budget

All right, good morning, everyone. I'm pleased to call this hearing to order. And we're going to go ahead and get started because I know members have planes to catch. And we still have folks coming over from the Capitol. Today we are going to hear SB 136, a bill on the floor that amends the MCO tax. This bill must be adopted this month to allow the state to apply for additional federal funds.

This proposal was heard in Subcommitee one on February 26, and our intent is to hear this bill today and then pass it to the Senate on Monday, March 18. This is an informational hearing only, and there will be no votes taken today. We are joined today, and thank you for joining us, by Erica Lee and Laura Ayala from the Department of Finance, who will present the bill. And we also have Jason Constanturos.

I think I got that right from the LAO, and Christian Griffith here from our budget team, who are available to answer any questions. And I have Mr. Fong's permission from our Vice Chair to get going. So, finance, please go ahead with your presentation.

Good morning, Chair Gabriel, members of the committee, Erica Li with the Department of Finance, and I'm here to present on SB 136, which is a portion of the administration's managed care organization, or MCO, tax proposal, which is one of many significant solutions that was included in the Governor's Budget. As you will recall, I testified before this committee on the Projected Budget Shortfall, which was estimated to be roughly 38 billion at the Governor's Budget.

In light of this significant shortfall, the administration asked the legislature to take early action to request the Federal Government approve an amendment to the recently approved MCO provider tax. So specifically, the administration proposes to modify the MCO tax, which was authorized pursuant to the 2023 Budget Act and approved by the Federal Government in December of last year, and this is for the period covering January 1 of this year.

Starting this year through December 31, 2026 this proposal will increase the MCO tax to achieve an additional 1.5 billion in net funding compared to the current MCO tax. So instead of 19.4 billion, the state will receive 20.9 billion in total funding. This additional 1.5 billion is proposed to support the MediCal program through 2627 and it helps maintain existing services and minimizes the need for reductions in the MediCal program.

I also want to highlight the fact that this proposal does not impact the targeted rate increases that were agreed upon as part of the 2023 Budget Act. To be able to collect tax revenues retroactive to January 1 of this year. As Chair Gabriel mentioned, this proposal needs legislative approval no later than the end of this month to give the Department of Healthcare Services the ability and the time to seek federal approval. We greatly appreciate the assembly's early movement on the MCO tax proposal.

It is an important solution. However, the magnitude of our budget shortfall is such that it is necessary to also come to an agreement and work toward a bigger, broader-based early action package so that we can begin to solve for the shortfall as I mentioned earlier. We look forward to working with the Assembly and the Senate toward this shared goal. Thank you very much. I am here to respond to questions along with my colleague Laura Ayala.

Thank you very much. And we also certainly look forward to those conversations. I want to ask the LAO if you have any comments that you'd like to share.

Jason Constantouros, LAO. In our analysis of this proposal, we recommended the legislature consider adopting the tax increase. This tax increase is a key part of how the Governor's Budget addresses the budget problem. And relative to other budget solutions, this particular proposal has some advantages.

It entails drawing down more federal funding to help address the budget problem rather than imposing new costs on taxpayers or cutting core government programs. That said, we also recommended the legislature ensure that the proposed increase aligns with federal rules to ensure that the tax has a reasonable chance of receiving approval from the Federal Government. Thank you.

Thank you. Thank you very much. I will now bring it back to the Committee. Are there questions or comments from members of the committee? Mr. Vice Chair?

Thank you, Mr. Chair. So I certainly have a few hospitals in my district, Ridgecrest and Kawea, that are facing financial challenges due to low MediCal reimbursement rates. How much of the proposed 1.5 billion, and this to Department of finance will Fund MediCal provider rate increases.

Thank you, Mr. Fong. So the 1.5 billion is actually going to be part of the solution for the budget problem. So it will provide 1.5 billion in general fund backfill.

So it won't be uilized for, this 1.5 billion isn't going to be used for any provider rate increases?

That's correct. The provider rate increases, though, and I'm not sure if you caught it, we continue to fund at the rate that was committed to at the 2023 Budget Act.

So then explain that to me. I know this proposal is part of a lot of moving parts, but the other piece of this does shift some of those funds into the last MCO discussion. It does shift some of those funds into the general fund as well.

So, yes, there are funds that I believe are in the current year and in budget year that we would be moving to help offset some of the need in the general fund. Again, we are committing to the rates that we agreed to as part of the 2023 budget, but those dollars will go to help the general fund deficit.

So how do you maintain the provider rate increases when you, none of this is going to go to provider increases, and then you're shifting 3.1 billion out of the Reserve, correct? You're shifting money out into the general fund. So do you get it out of the Reserve? Is that how you make up the difference?

Sure. Let me start, and then I will hand it over for some details to my colleague. But the dollars that will be shifted would go towards assisting the general fund condition. What we would have to do is to have conversations one year earlier at the end of this MCO tax to basically decide how we would be paying for those rates forthcoming.

So this was a discussion that we would have had to have at the end of this MCO timeframe, and it is something that we will have to have a year earlier.

Just to clarify, Laura Yala, Department of Finance. The Budget Act, 2023 Budget Act, included an MCO tax, and that MCO tax has already received federal approval. That is the MCO tax that includes $8 billion for provider rate increases.

What we're proposing here today is an amendment to that existing MCO tax for an additional 1.5 billion. And the entire 1.5 billion is proposed to be used to support existing services in the MediCal program. So this is an amendment to the existing, and it's basically a separate proposal.

So how do I square that? Right? Because I just heard that the 1.5 billion isn't actually going to be used for provider rate increases. And then in the part of the whole conversation, you're shifting some of the revenue from last year into the general fund and you're maintaining the provider rate increases. But there's a delta. So then how do you make up the delta?

So you're referring to the MCO tax that is currently implemented. And like we've mentioned before, what was shifted that it will now be used to support the MediCal program is from the balances of current year and budget year because of timing.

How does it support the MediCal program if it's going to be put into the general fund?

It's going to support general fund.

So is it dedicated to the MediCal program?

Yes, it's going to support what would have been used as a general fund to support MediCal program.

You can't say general fund and then MediCal. So is it going to the general fund or is it dedicated to MediCal?

It's dedicated to MediCal and it's what would otherwise have been used.

So then why are you shifting it out of the General Fund? Why are you shifting it to the General Fund? Right.

Mr. Fong, the state has used the MCO for quite over a decade as a source of getting additional federal participation into our MediCal program. And as you know, we have one of the lowest federal matching rates of any state because of the way the feds set it up.

And so this is a mechanism that we in other states use to be able to draw down additional federal funds. Exactly what this is doing. So what they're proposing is consistent with what the legislature has adopted over the last couple, last decade.

I just want to make sure that we're all on the same page because there's talk of shifting it to the general fund.

There's talk of making sure it stays in MediCal, and there's also talk now that this proposal isn't going to go to provider rate increases, it's actually going to the general fund as part, to quote what you guys said, is a budget solution. So if there's a deficit, I just want to make sure that we as a committee understand that. Is this money staying in the healthcare MediCal space, or is it going to be attempting to fix the deficit? Right.

Because that was the concern we had last year, which is not only are we creating a fiscal cliff, but if the economy and the budget deficit expanded and got worse, which unfortunately, this committee kind of predicted that the fear was the revenue would be shifted to fix the deficit and not be provider rate increases. Because when we debated the MCO revenue discussion last year, it was promised for provider rate increases to support our doctors and our nurses and our hospitals.

Mr. Fong may I?

Yes.

So the MCO tax in the past has not been used for rate increases. It's been used to what we say, maintain the MediCal program so that we don't have to make cuts. And so when we say that this 1.5 billion is going to support the general fund and it is going to sustain MediCal, that is both correct.

Okay.

So otherwise we would have to use general fund to backfill and provide additional funds for those rate increases. We are not cutting the rates that were agreed upon at the 2023 Budget Act, but this 1.5 billion will help otherwise use general fund towards those rates. So I guess what we're saying is taking this additional 1.5 billion in federal funds will help offset any general fund we would have spent to maintain these provider rates.

Other members ask, so let me just ask this very specifically, because the MCO debate last year was that this proposal was going to go forth to be used for provider rate increases. Is that correct?

Yes.

Okay. And that still will be under what you've said, except for there's now two moving parts. The first part, which is not part of this conversation, but it's tied to it. Right. Is that you're going to shift some of that revenue from last year into the general fund, but then maintain the provider rate increases. The question I have is if you shift on one side and then maintain there's a delta, and I guess I'm asking what the delta is.

And then the second question is that we need to answer as a committee, is that this proposal, this bill, none of it is going to provider rate increases. Right. It's going to something. And what that something is, what I'm being told right now is that it's going into the general fund. Right.

I just want to make sure that we're clear as a committee that one, there's a delta from last year now being created because of the shift, and that technically is not right because we were promised that that was going to go directly to provider rate increases. And then this proposal doesn't go to provider rate increases. It's going to the general fund as a budget solution.

And I'm not sure that the public and myself is very assuaged or I'm not very confident that now that money is going to be not used for something else. So I'll leave that as a question that you can answer, hopefully. And then I'll leave it to my other colleagues to ask additional questions.

Miss Li, go ahead. And then.

Okay, so let's just start big picture. Last year's MCO proposal that was approved by the Federal Government was for 19.4 billion total. We are asking for permission to go back to the Federal Government to ask for an additional 1.5 billion, which would bring us to 20.9 billion. So of that, there was a portion that was promised for rates and there was a portion that would provide general fund support. And this 1.5 billion we're saying is we're putting in that bucket of general fund support.

And so we haven't touched the dollars for the provider rates. That's what's before you. The second piece, which is a different piece that we'll be discussing outside of this early action proposal is there was a reserve that those funds, 3.1 total from budget year and from current year, would have been used in the out years to provide support for rates. So currently the rates are going to go into effect. They're going to increase as committed to.

And what I was saying earlier is that when the time comes, we're going to have to have conversations about how to maintain those rate increases in the out years because those dollars we're bringing forward to help the general fund.

So you're taking out year resources into this year to make up the difference of the general fund shift, is that correct? Okay, I appreciate that. That does clarify things. It still doesn't relieve my concerns because now there's a concern now of the out year. Right. I don't know if the, I may just ask if the LAO has any comments as well.

Yeah, I think the administration clarified that issue. Just wanted to make sure it was clear that.

So last year's package, there was a portion of it dedicated to provider rate increases and another portion dedicated to offsetting general fund spending in MediCal, in effect helping the state to sort of address the budget problem. And so for the portion that was for provider rate increases that's being supported by the MCO tax, if the state continues to renew the MCO tax at the same size it is today, then those would just be continued to be funded by the MCO tax.

Now, as the administration noted, and as the Federal Government has since sort of publicly stated, the Federal Government is considering rule changes that could affect the size of the next MCO tax, could be much smaller. And that's what the administration is sort of planning for in its budget plans. That means that there is a sort of budget shortfall in the MCO tax package.

The provider payment reserve had reserves baked into it so that it could sustain those rate increases for an additional few years before turning to, say, the general fund, for example, to maintain those rate increases. By doing this shift from the reserve, the administration is basically accelerating the time to when the reserve is spent down by about a year or so. That decision about how to sustain those increases would be accelerated by a year.

So just to be clear for myself and for other members, what this proposal is doing, I guess, for the cost shift is to take revenue from out years and move it into this year. But then we still have a problem in the out year.

I'm just going to jump in here. I appreciate all the questions. I think it's really important. We're getting a little bit beyond the scope of what's in front of us today.

And so I just want to make sure that we're not conflating different things that are going on, this is a really worthy and important conversation, one that I think we're going to have in our Budget Subcommittee 1. And at other points as we move forward, the proposal that's on the table for us today is, do we want an additional $1.5 billion in federal funds? And that's really all that we're considering today.

I totally appreciate what the Chair is saying, I guess, to everybody, this is not in a silo, I guess, is the point I'm trying to make is that this proposal is part of, in conjunction with what is also being proposed. And so I'm trying to understand how they're tied together.

There are other proposals out there that the administration has made conversations that we need to have as part of the budget process, as part of early action. So I just want to clarify, and,

So thank you, Mr. Chair. I appreciate it. I'll follow up after the committee.

Thank you. Yeah. And if you come to my office, we can draw some pictures and set it all straight. I do want to go to our Subcommittee Chair, Dr. Weber.

Thank you. Chair Gabriel, thank you so much for being here. And, Chair, if you will just indulge me for a few minutes, because I do think the fact that we've started to go down this rabbit hole has maybe confused people a little. So, because we have had this conversation about both the early action item and the shift in the funds in Sub One Committee already.

So, Ms. Lee, can you remind all of us with the original MCO Tax Bill, what year were the provider payments supposed to end? What year did it go out to?

According to the original MCO proposal that has actually been approved already is 28-29.

28-29. Now, with the shift of the $3 billion, what year will the provider rates stop at?

Well, the provider rates won't stop, but the funding will be used up one year earlier.

Right, so now we're talking about 27-28. The provider rate increases that we all agree to, that we desperately need for these three specific areas and some others. Are they the same that we voted on last year?

Yes, they are.

Are we as a state and the Governor's office committed to maintaining these rates even after this current funds are gone?

Yes, the administration is committed to those increased rates.

Right, so we're not talking about a proposal that's actually going to change the provider increase rates that we agreed on. We're just stating that a year earlier, we're going to have to come together to figure out how we maintain these rates, correct?

Yes, that's correct.

Okay. And the 1.5 billion that we're going to the Federal Government to ask for more is so that we don't have to go back and cut anything from our programs nor from our MediCal, I mean, our provider rates.

That is correct.

Okay. I just wanted to make sure that that was clear because even I was starting to get confused with the route that we were going. So I just really want to thank you all and the Governor for being very creative and realizing that there may be some more funds that we can go out and get so that we do not have to go back on our word.

We can continue to keep the word for increasing our provider rates as we voted on and also prevent us from having to go into our healthcare space and cutting some programs and other services for our patients. And so we have had extensive conversations about this and even in our Budget Sub One. And I really just want to thank you all for doing this and I look forward to supporting this once it hits the floor. Thank you.

Thank you, Dr. Weber. That was an A plus direct examination. It's not too late to go to law school, so thank you for that. Any other comments or questions from members of the committee? Mr. Essayli?

Okay, Ms. Li, I want to better understand this. So the $1.5 billion proposed tax increase is going to be used to leverage federal funds, is that correct?

That is correct.

Okay. This year in the Governor's Budget, he's allocated $4 billion to fund the expansion of medical to illegal immigrants, an estimated 700,000 new people. Will any part of this money be used to fund that health care coverage?

This funding is only for the MCO proposal.

But isn't the money being used to pay for MediCal costs?

I'm going to turn over to my colleague for some details.

The $1.5 billion will support capitation payments for adults, children and persons with disabilities.

Including persons with disabilities, including illegal immigrants.

Individuals, all enrollees in MediCal.

So we're going to take federal dollars. Does the Federal Government know that we're going to be using federal dollars to pay for illegal immigrants to California? Is that authorized?

California pays with general fund for full-scope services for individuals, regardless of immigration status, who do not have satisfactory immigration status. And there's no federal funds used for any services beyond emergency scope services which are authorized by the Federal Government.

So you're assuring us that none of this money that we're taxing, the 1.5 billion and the reimbursement from the Federal Government is going to be used on the new illegal immigrant healthcare funding or coverage.

No federal funds will be used for services that are not permissible by the Federal Government.

Okay. So we're going to use state tax dollars for that.

We're going to be using general fund.

Okay. And what is the Governor's current projection of the shortfall in this year's general fund?

The projection that we have that the Governor's budget is the most recent, 38 billion.

And what's the LAO's current projection of the shortfall? Is LAO on the panel?

They're here.

Yeah. Sorry. I came prepared for the MCO tax discussion. I'm sorry. Our Legislative Analyst will answer that question.

Good morning, Mr. Essayli. Gabe Petek, Legislative Analyst. Our estimate is that the administration's budget proposal actually solved for a $58 billion budget problem. More recently, we've updated our estimates based on new tax collection data, and our current revenue estimates put that number at 73 billion.

Okay. So it's still over $20 billion difference between your two offices. Okay. All right. So we're going to be spending 4 billion of money we don't have to cover this new expansion of healthcare is what it sounds like. All right, Mr. Chair, I have no further questions.

Any other questions or comments from members of the committee? Okay. Seeing none, I just want to echo the comments of Dr. Weber. Appreciate this proposal.

Appreciate the creativity from the administration and your continued partnership as we look to address the budget challenges in front of us. To me, it's a total no-brainer to go out there and draw down these federal funds to help support providing health care to folks here in the State of California. So thank you for that, and we will look forward to voting on this proposal on Monday on the Assembly floor.

And with that, let me just also say thank you to the LAO for being here, for appreciate, for our color-coded native assembly budget staff, for all of your hard work, and to the sergeants with that, this hearing is adjourned. Yeah. My sincere apologies. We're going to reopen this hearing for public comment if there's any.

Thank you, Mr. Chair Members, just in the interest of time. Nick Louizos with the California Association of Health Plans.

Our members are the ones paying the tax, and we agreed to support the tax last year because the overall package was affordable to premium payers, in our estimation, and the money was going to be used to supplement and not supplant resources in the MediCal program. We're pleased the Governor's office is honoring the commitment for this to go to the right places and we are supportive of the $1.5 billion increase on the MediCal component of the MCO tax during this budget crisis.

So we just urge the legislature to ensure that the revenues go to the intended targets. We were supportive of primary care and specialty care increases in the program and other things, so we hope that the overall funding and the targeted rate increases remain consistent with that deal from last year. So thank you.

Thank you.

Good morning, Chair and members. Janice O'Malley with Ask Me California just appreciate the administration and the legislature on this important measure. We support the $1.5 billion extra and also just really appreciate the $50 million that was agreed upon last year for ground emergency transportation. Thank you.

Thank you.

Good morning. Chairs and Members Trent Murphy, speaking on behalf of CATP, the California Association of Alcohol and Drug Program Executives here in support of the MCO tax proposal. I just wanted to update you all that. We're working on a coalition of behavioral health providers across the state on submitting a letter to the Governor's office, and we'll also be including you in that letter. Thank you.

Thank you.

Good morning. Linda Wei with Western Center on Law and Poverty. We support a larger accelerated MCO tax, noting that it brings in significant general fund that's desperately needed to protect the safety net. We also support any consideration to equity adjustments. Thank you.

Thank you.

Good morning. Ronald Coleman Baeza here on behalf of the California Panathic Health Network CPEN, we are in strong support of an expanded MCO tax to bring in additional dollars. We do not want to see additional cuts, particularly to programs within MediCal. Also, as it relates to the equity adjustments, we want to see some more specificity, particularly around how dollars will meet the needs for disparities that are hitting particular racial populations.

We also want to make sure that there's data in place to actually track what's happening with the dollars that go out the door with the equity adjustments. And we also think that the equity adjustments should be used to include CHWs as well to further equity as well. We were very disappointed that CHWs were left out of the MCO tax conversation last year as it related to provider rates.

And we are hopeful that we can have a separate conversation this year, particularly about making sure we do increase the rates for CHWs using the unspent dollars that have already been allocated for the program. We do not want to see that population get discriminated again and not be included in provider rates moving forward. Thank you.

Thank you.

Good morning. My name is David Bolog from Neighbors of the 40th Assembly District for Sane Legislation want to thank Mr. Essayli for bringing sense and common sense insanity to this hearing today. Thank you.

Do we have any other members of the public wish to provide comment? All right, seeing none. Thank you, everybody, for joining us here today. We appreciate it. And we will look forward to taking up this bill on the Assembly Floor on Monday. Hearing is adjourned.